Global Crash 2.0
There are many reasons why a second much larger crash is now impending. The primary reason is investor over-confidence as demonstrated by rampant election buffoonery. Each side is confident they will win and ride to the economic rescue. We don't know who will get elected, but we know that the election will be close and it could be contested. When Biden won the election in 2020, it took weeks before the various concerted attempts to overturn the election ended. Culminating with the sacking of the United States Capitol. This time it could be worse. None of that rioting is priced into markets.
Markets are certain that Trump will be elected. The leading sector year to date is financials and within financials the leaders are Wall Street brokers and financial asset managers. In this chart we see that asset managers are having their biggest weekly blow off top (consecutive % win streak) in history. Recall that after the 2016 election Trump's FIRST order of business was to deregulate the financial sector and begin to dismantle the Dodd-Frank regulations that were created in 2008. The main thing he did was to eliminate any concept of "fiduciary duty" on the part of financial advisors. Now he is planning to finish the job he started in his first term:
On the topic of complacency, in this chart we see that the high yield spread is the smallest in 20 years. Which is a measure of overall financial risk appetite.
In addition to hyper aggressive positioning, another risk to these markets is the unwinding of the AI trade which started in August and then corrected back to recent lower highs but is now unwinding again.
Recall that during the rally phase "hyperscaler" AI spending was used to justify buying Tech stocks. Now this exact same reason is being used to justify selling Tech stocks:
"A backlash to tech companies spending eye-watering sums on artificial-intelligence technology was always in the cards. Meta (Facebook) and Microsoft look to be suffering after posting their earnings reports, but there’s no sign it will put a halt to the AI race."
Indeed, nothing can stop Artificial Intelligence from ruling this Idiocracy.
Here we see that the Tech sector is breaking back below the 50 dma for the first time since August:
All of which gets us back to the August crash which I call Crash 1.0. Recall that it was the Tokyo Nikkei that led global markets down in the week after the U.S. jobs report. Now the Nikkei has retraced back to the same level just in time for the next jobs report which is tomorrow.
In summary, markets are certain the Fed will cut rates next week. Which in the context of a global meltdown will likely final implode the Yen carry trade.
96% confidence.
